Thursday, April 16, 2015

The Power of Agreement


The word ‘agreement’ has a unique potency of impact throughout the Uniform Commercial Code.  In the same way that section 1-103(b) can ‘change’ a contract through the application of supplemental contract law principles as in the case of  In re Invenux,  application of the concepts contained in section 1-201(b)(3) can do the same thing via the terms of the agreement.   Also of importance is Section 1-302, ‘Variation by Agreement’, which states the general freedom of contract principle in subsection (a), as well as certain limitations on freedom contract under the Code.  In addition, a significant number of Code sections contain the words ‘unless otherwise agreed’ and of course, we have seen ‘agreement of the parties’ as one of the underlying purposes and policies upon which the Code is drafted under Section 1-103(b). The drafters of the Uniform Commercial Code made it emphatically clear that freedom of contract was a fundamental principle of the Code not just inferentially through the provisions stated, but in Comment 1 to Section 1-302.         
Subsection (a) states affirmatively at the outset that freedom of contract is a principle of the Uniform Commercial Code.
In upcoming posts, I will share some of the wonderful avenues available for drafting.  For now, it is essential to lay the basic foundation of the contract and the agreement.
As noted in the last post, the definition of agreement is comprised of five elements:

1. The language used by the parties;
2. Course of performance;
3. Course of dealing;
4. Usage of trade;
5. Inferences from other circumstances, in addition to inferences from items noted in # 1-3 above.


1.    The language used by the parties
In gathering the facts, it is important to remember that anything relevant said, whether verbally or in writing, is valuable information.  While there may be limitations on the use of some of this language via the parole evidence rule, it is still part of your client’s story and one never knows where things lead. In addition, there are certain Code sections which make it possible to introduce oral evidence provided it is done in a certain manner. In eliciting information from a client or prospective client, it is very helpful to track the language of the sections which are referenced in Section 1-201(b)(3).  In so doing, you will have covered the parameters of the parties’ agreement.
2.    Course of Performance
The second potential element of the contract is ‘course of performance’. The words ‘potential element’ are used because there may not be a course of performance in a given transaction since certain specific elements are required.  Course of performance is defined under Section 1-303(a):
A "course of performance" is a sequence of conduct between the parties to a particular transaction that exists if:
(1)                   the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
(2)                    the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.  Section 1-303(a).
The first element requires a ‘sequence of conduct’ to a ‘particular transaction’; hence, other transactions between the parties do not impact ‘course of performance’. The sequence of conduct in the particular transaction becomes a ‘course of dealing’ if the contract involved ‘repeated occasions’ for performance, the performance of one of the parties to the contract is non conforming to the contract, and the nonconforming behavior was accepted overtly or passively by the other party.
            By way of illustration: Assume Seller and Buyer have a written contract under which Seller is to deliver 20 carloads of oranges on the first of each month from April 4, 2014 to April 3, 2017.  Shipments routinely arrived between the 8th and 11th of the month.  For the first 11 months of the contract, Buyer said nothing.  However, when the March 2015 delivery showed up on March 11th, Buyer rejected because the ‘delivery was late’.
            If Seller were to litigate the matter with Buyer, Seller would have a very strong argument that the date of delivery under the contract has been modified by the course of dealing.  The contract had ‘repeated occasions for performance’. Seller’s time of delivery was consistently in violation of the due date for delivery; Buyer said nothing.  In essence, Seller is arguing that Buyer ‘waived’ his or her right to the delivery date originally stated in the contract by not saying anything about the late deliveries for one year.
3.    Course of dealing
The third element of the ‘agreement’ is ‘course of dealing’.
A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.   Section 1-303(b)
Upon a quick review of the text of Section 1-303(b), it is clear that the situation envisioned involves ‘previous transactions’ between the parties.  A course of dealing will arise when the ‘conduct’ concerning those transactions is at a level which creates a ‘common basis of understanding for interpreting their expressions and other conduct’.  In other words, what they have said and done in past transactions will have bearing on what they have said and done in the transaction under discussion.
            The definition of ‘course of dealing’ was amended with the Article 1 amendments.  The earlier version had a ‘course of dealing’ which could be based upon ‘previous conduct’ between the parties’, rather than ‘previous transactions’.  I believe the former version is the better of the two. The rationale for the section lies in the fact that, in the situation envisioned, parties to a business transaction have reasons for understanding what the other party means when he or she says or does something.  This increased understanding can occur outside of the business transaction realm. It could occur in business club; it could occur at a weekly golf game or many other places.  The point is, if there have been some prior dealings between the parties which shed light on what they mean in a given transaction, I believe that should be allowed.
            I would make the argument that interactions outside of the business context should be within the definition of course of dealing.  I would begin my argument with a favorable dictionary definition of the word ‘transaction’: 
                A communicative activity involving two parties or things that 
                reciprocally or influence each other.
                                       Webster’s Dictionary
Clearly, there is no requirement in that definition of a business related activity. From there, I would go back to Section 1-103(a) and fashion an argument through the purposes and policies.  To all listening—Courts frequently use the dictionary in UCC cases.
The final stated element of the agreement is ‘usage of trade’, which is one of those extremely important and pervasive concepts of the Uniform Commercial Code.  ‘Usage of trade’ will be discussed in the next post, but I want to share a thought with you about that as an introduction to the topic.  You may not have a ‘course of performance’; you may not have a ‘course of dealing’; but there will almost always be a usage of trade.  That usage of trade is part of virtually every agreement under the Uniform Commercial Code.

 
Learning Suggestion:  Try the exercise above.  See what policies favor a more inclusive definition of transaction versus the business transaction limitation. It will crystallize the process in your mind and lay the foundation for what will emerge as a general structured approach to the Uniform Commercial Code.  When doing so, systematically review the text of the statute under consideration.  Visual stimulus is a very important part of the process. 

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